If you’re thinking of applying for a loan or a mortgage, you’ve probably already heard about proof of income, a key security process for verifying a person’s or another business’ source of funds. In other words, as an applicant, you need to demonstrate that you have enough income to meet your future obligations and repay the loan — otherwise, you’re rejected.
From a financial institution’s perspective, checking proof of income means approving a legitimate transaction and starting a business relationship with a transparent and trustworthy entity. And, when another business is asked to provide proof of income, that means they will need to show their tax returns, cash flow statements, and other official financial documents.
Proof of income is also required before high-risk situations, such as a high-value transaction, as a measure of Enhanced Due Diligence (EDD). So, it all boils down to the particular use case or transaction and status (if they’re a business, an employee, or perhaps a self-employed person). For example, it can be a simple rental agreement or an application for a government assistance program.
In this blog post, we talk about more use case examples, the types of different proof of income documents, and what role financial institutions have in this context.
What is Proof of Income?
Proof of income is a verification process where a set of documents needs to be checked to verify a person’s or a company’s earnings over a specific period of time. Banks, lenders, landlords and other companies with money flow use this method to verify one’s ability to cover expenses and ensure that they are eligible for their financial commitments.
The goal of proof of income verification is to:
- Assess associated risks and evaluate the applicant’s financial situation.
- Trace the true source of funds and verify that the income comes from a legitimate source (for example, not a money laundering channel).
- Help regulated entities comply with Anti-Money Laundering (AML) requirements and implement due diligence procedures.
For example, a lending company asks for a proof of income document to check how much the potential borrower earns over a year. This helps guarantee that the person is stable and has a proper income stream. Common proof of income documents are the person’s salary, but they can also include other types of income sources, such as pensions or unemployment benefits, including passive income forms, such as money from property rentals and other investments.
In Which Cases Should You Provide Proof of Income?
Mortgage approvals, loan applications, or tax filings require the person to provide proof of income documents as a way to confirm their financial stability. However, this is also a common check for simpler activities, such as obtaining a credit card or renting a new apartment. So, any agreement that is based on financial trust typically requires you to verify your income.
Businesses view the proof of income verification process as a way to guarantee that their clients have a legitimate income source. This allows them to receive or make investments while preventing unlawful activities, like fraud and other types of financial crime. For this reason, most financial institutions and banks also ask to provide proof of income when onboarding new customers. This is part of the Know Your Customer (KYC) framework.
Examples of Companies that Ask You for Proof of Income
Proof of income is also commonly requested by financial companies and others, including:
- Employers (for salary calculations).
- Veterans’ programs (for financial aid).
- Food assistance programs (for free ration eligibility).
- Government agencies (for pensions, loans, and disaster relief).
- Healthcare providers (for medical benefits and subsidies).
- Educational institutions (for income-based scholarships and quotas).
- Business grants or loans (to meet specific eligibility criteria).
Proof of income helps the bank lending the money or the landlord renting the apartment make a timely decision about whether the person can cover the costs on their end. This helps verify their financial status, setting a clear picture for the decision-maker.
In general, most companies and financial institutions have clear guidelines for what kind of proof of income documentation they accept. It depends on the transaction, the institution, and the type of request (for example, if it’s a business loan or a personal loan).
Related: What is Loan Fraud? Types and Prevention Tips
What are the Most Popular Types of Proof of Income Documents?
Proof of income documents can be grouped into three bigger categories:
- Proof of income for business owners
- Proof of income for self-employed individuals (who use personal accounts)
- Proof of income for retirees
For example, business owners can provide pay stubs (if they pay themselves the salary), employed individuals can use employment verification letters (which they should request from their employer), and retirees can verify their proof of income through documents like annual pension statements, trust fund income or inheritance.
We review the most common document examples in more detail below.
Proof of Income for Business Owners
1. Business Bank Statements
These documents show a detailed overview of the company’s income and expenses (or spending habits), which can come from different sources. Since there’s a lot of information there, bank statements reflect the business’ financials, making this proof of income document a good tool for financial assessment. In general, like with personal bank statements, you can download them from your online banking site or app.
2. Business Tax Returns
These are documents that summarize a business’ annual income, both showing loss and profit statements or tax returns. For example, if you’re applying for credit, you’ll be asked to provide business tax returns as a way to prove your profitability and ability to repay the borrowed money. According to the IRS, all businesses (except partnerships) are required to file an income tax return annually, which makes it an accessible proof of income document type. You can get it from the tax authority’s website, where you submit your filing report.
3. Financial Statements
Balance sheets, cash flow statements, as well as profit and loss statements are different types of business financial statements, or formal records that describe the company’s financial state. Documents in this category require maintenance, so they’re often certified by an accountant. For example, a company that’s looking for investors and funding would need to demonstrate its profitability, and that means providing financial statements so that others could assess the risks regarding the potential investment.
However, documents like cash flow statements also show the business’ general financial strength, showing how much the business is earning and spending, pinpointing the areas for improvement that managers can use to prevent certain challenges in the future.
Proof of Income for Self-Employed Individuals
4. Tax Returns
Freelancers, advisors, and other types of self-employed individuals don’t receive standard pay stubs, so they have to use alternative proof of income documents. For example, a freelancer who’s applying for a mortgage provides their tax returns as a way to verify their information on profits and losses that they collected from their business activities.
In general, self-employed professionals can file tax return forms, which differ depending on their country of residence. For instance, in the UK, such individuals use the SA103 Form. In the meantime, in the US, self-employed taxpayers file the IRS Form 1040 with Schedule C.
5. Profit and Loss Statements
Profit and loss statements are a good option for self-employed professionals who have fluctuating earnings and can’t provide a traditional income statement. This financial document shows the person’s revenue, costs and expenses over a certain period, mainly focusing on demonstrating their earnings in the context of proof of income verification.
For example, a freelance architect who lands projects can struggle to show a consistent earnings record. However, platforms like Upwork provide transaction logs that show evidence of cash flow, helping them when submitting a profit and loss statement.
6. Invoices and Contracts
Both invoices and contracts include a concise description of the service that the self-employed individual provided, including other vital details like the payment conditions for the agreed-upon work and amounts due during the cooperation with the client or partner. This serves as a tool to show your earning capacity during the proof of income verification process.
However, invoices and contracts are often combined with other proof of income document types, such as bank statements. For example, a freelance photographer submitted signed contracts and bank statements showing corresponding payments in their loan application as a way to reassure the lender about their financial health.
7. Bank Statements
Like many proof of income forms, a bank statement supports other documents showing deposits and the self-employed person’s income. It includes the account balance, activity and all transactions, highlighting consistent cash flow, such as the person’s payments or savings. Similar to the mentioned business bank statements, personal bank statements provide a detailed transaction log within a certain period. If the self-employed individual wants to rent an apartment, for instance, they’ll be asked to provide personal statements to prove their ability to pay rent.
Proof of Income for Retirees
8. Annual Pension
There are annual pension statements, pension slips, or pension forms, depending on the retiree’s residential country. In general, annual pensions are retirement income payments provided regularly, often by official government programs that serve as a good channel for income verification. Sometimes, fintech platforms partner with RegTech providers that use open banking and similar technologies to verify documents and cross-check information safely directly with the bank.
9. Personal Loan Agreements
Typically not required to be approved by notaries, personal loan agreements show a contract between the borrower and the lender. In this case, the retiree can borrow money from a family member, and this way, they might need to justify the funds and provide proof of income, such as a personal loan agreement. However, a valid agreement document needs to formulate the loan and its terms, describe expectations from both parties, have a clear repayment schedule, and be enforceable by courts if required.
10. Trust Fund Income
Verifying a trust fund is also very important because it confirms the existence and legitimacy of the trust fund while preventing fraud and reducing the risk of fraudulent transactions. In the context of proof of funds verification, assessing a trust fund helps build credibility, instilling trust in the retiree’s ability to fulfill their financial obligations.
Trust fund documentation may be required for the retiree when they are asked to verify their source of funds before a large transaction. Banks do that to fulfill their AML obligations. In general, verifying trust fund income ensures the funds are available and accessible when needed.
What Shouldn’t Be Used as Proof of Income?
Some documents that don’t have the date, personal information, or the official layout of the proof of income document can’t be used for verification. No matter if it’s a company or a self-employed individual, documents that lack formal recognition are invalid.
For example:
- Plain receipts
- Future income projections
- Unofficial loan agreements
- Handwritten income attestations
- Personal claims of assets (without extra documents like property deeds)
Sometimes, even long-term clients in a bank or any regulated entity change their behavior, and for this reason, ongoing monitoring and a risk-based approach to AML compliance is required. So, to prevent document forgery, all proof of income documents must meet official standards. This ensures the proof is legally valid and can provide a proper picture of the client’s financial situation.
Most regulated entities, such as fintech firms, loan service providers, PropTech companies and other institutions that use proof of income verification procedures daily, have a dedicated compliance team that reviews such documents. They need to ensure that the clients’ submitted documents are accurate. For example, last year’s tax forms might not show the applicant’s current financial status since their income might have gotten bigger.
Final Words on Why You Should Take Proof of Income Seriously
Of course, the key reasons why financial companies use proof of income are a) to prevent fraud and b) to ensure AML compliance. By verifying these sorts of documents, businesses can check the individuals’ stated income sources, such as assets from their business or salary from employment.
This helps industries like lending confirm that their client will be able to repay their loan. Some companies incorporate proof of income verification as part of their HR or onboarding process, particularly for candidates applying for high-responsibility roles where assessing their previous employment and income history is vital.
How iDenfy Can Help
At iDenfy, we specialize in various document verification solutions, including custom-tailored, no-code questionnaires for KYC/KYB compliance (where you can ask for any sort of document, including automatically collecting proof of income documentation).
Recently, we’ve launched our open banking API, which allows you to assess risks and access the whole transaction history log along with other key functionalities:
- Grading customers based on their financial health.
- Accessing balance sheets to detect potential debts.
- Automating the proof of income verification process by extracting bank statements and other documents.
- Downloading various PDFs for quicker data analysis and auditing purposes.
Let’s talk about your particular use case.
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